## Facts

- Investors purchased stock of American Solar King Corporation (ASK) and later sued ASK’s outside auditor, Main Hurdman, under § 10(b) and Rule 10b-5 based on the auditor’s qualified report on ASK’s 1982 financial statements.
- In 1982 ASK expanded into an industrial solar program involving sales to limited partnerships financed largely by notes and tied to projected energy-cost savings.
- ASK’s first major industrial transaction was a $1.75 million system for a Wisconsin user (Provimi), sold through a limited partnership that paid minimal cash and issued substantial short- and long-term notes.
- The Provimi transaction was executed one day before fiscal year-end, and ASK recognized substantial 1982 revenue and profit from it.
- To secure the transaction within the fiscal year, ASK officers and directors acquired a significant portion of the limited partnership interests.
- Main Hurdman’s audit planning materials reflected scrutiny of notes receivable valuation and the allowance/reserve for uncollectible accounts.
- An internal auditor memorandum concluded ASK’s reserve for doubtful accounts was understated by roughly $200,000–$300,000 and noted ASK’s resistance to increasing the reserve.
- Main Hurdman’s final report did not state the reserve was inadequate; instead, it qualified the opinion by stating the firm was “unable to determine the adequacy” of the reserve.
- Plaintiffs alleged the financial statements (including recognition of revenue/profit and treatment of receivables/reserves) overstated ASK’s performance, inflated the stock price, and that the audit report was misleading because it concealed the auditor’s actual concerns.
- The district court granted summary judgment for Main Hurdman, finding no genuine issue of material fact on scienter or reliance; plaintiffs appealed.

## Issues

1. Whether the record raised a genuine issue of material fact that the auditor acted with scienter (intent to deceive, manipulate, or defraud, or severe recklessness) in issuing its qualified audit opinion.
2. Whether the record raised a genuine issue of material fact on investor reliance (including market reliance) sufficient to defeat summary judgment.

## Decision

- The Fifth Circuit reversed the summary judgment for Main Hurdman and remanded.
- The court held plaintiffs produced sufficient evidence to create triable issues on scienter and reliance.
- The court emphasized Rule 56 limits: courts must view evidence favorably to the nonmovant and may not weigh evidence or resolve credibility disputes at summary judgment.

## Legal Principles

- § 10(b)/Rule 10b-5 scienter requires intent to deceive, manipulate, or defraud, or severe recklessness.
- In auditor-liability cases, internal audit documents reflecting concrete concerns (e.g., inadequate reserves or questionable collectibility), combined with a public report that characterizes those concerns more equivocally, can support an inference of scienter sufficient for jury determination.
- “Red flags” surrounding a transaction—such as last-day execution, financing dominated by notes, and insider participation—may contribute to a fact question on whether an auditor knew of, or was severely reckless regarding, misleading financial reporting.
- Reliance in securities-fraud cases may be shown through indirect proof, including a fraud-on-the-market theory when an auditor’s opinion is part of publicly available information affecting price; disputes about market efficiency and price impact are commonly fact questions.
- Summary judgment is improper where reasonable jurors could differ on inferences drawn from the evidentiary record regarding scienter and reliance.

## Conclusion

The Fifth Circuit held that documentary and circumstantial evidence concerning the auditor’s internal assessments and the company’s end-of-year transaction structure could permit a jury to find scienter and reliance, requiring reversal of summary judgment and remand for further proceedings.


Fine v. Am. Solar King Corp., 919 F.2d 290 (5th Cir. 1990)